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Saturday, March 2, 2019

Corporate Performance and NPAs

Santosh Kumar Das

The current NPA problem
suggests two distinct characteristics. These are, the non-performance of large
loans, mainly corporate loans as primary reason behind accumulation of NPA in
Indian Scheduled Commercial Banks (SCBs), and substantial volume of NPAs
accumulated by the Public Sector Banks (PSBs). As per recent data, large
borrowers constituted more than 54.6 per cent of the total loans disbursed by
the SCBs and 83.4 percent of the large loans have turned NPAs. These large
borrowers are found to be the source of high NPA in the banking sector.

There has been a
perception that the non-performance of large loans, mainly corporate loans is
because of weak corporate performance. Predominantly, it is the weak corporate
performance that has constrained the corporate sector to serve its debt. Therefore,
it is a genuine case of weak corporate balance sheet leading to loan defaults. A
study of the balance sheet of the borrowers, in this case the companies or
firms however do not suggest any serious crisis in the corporate sector which
could have constrained them in paying back their borrowed loans.

The financial
performance indicators of Non-Government Non-Financial (NGNF) listed companies
suggests that corporate performance on several indicators has improved. The
sales grew at 9.8 percent in 2017-18 against previous year (2016-17). Operating
profit while decline marginally from 5.4 percent in 2016-17 to 5.2 percent in
2017-18, growth of gross profit remained stable at 5.2 percent in 2017-18.Growth of operating profit of both the Public
and Private Limited Companies suggest that companies are doing well in terms of
profit earning. The growth operating profit of the Public Limited Companies has
increased from 12.4 percent in 2014-15 to 13.5 percent in 2015-16. However,
while there has been a decline in the growth of operating profit of the Private
Limited Companies from 21.9 percent in 2014-15 to 12.9 percent in 2015-16,
profit growth seems to be sound. The recent RBI Annual Report (2017-18) has
also stated that corporates have recorded higher sales growth and there has
been improvements in profitability. Overall, the corporate data suggests that
corporate sector as whole has performed well on indicators of growth of sales
and profit growth.

The Interest Coverage
Ratio (ICR) which measures whether a firm is earning enough to repay its debt
suggest that corporate sector is earning enough to serve its debt. The ICR
reflects the firm’s capacity to pay interest out of its earnings. The ICR
improved to 4 times in 2017-18 from 3.2 times in 2016-17.While, the corporate
sector as a whole is doing well on earning indicators, however, there are
certain sectors like Textiles, Iron and Steel, Electricity and gas supply, Construction,
and Telecommunication which seems to be under stress. The interest burden and
interest coverage ratio of the above-mentioned industry group suggest that the
firms in these sectors are financially constrained to meet their debt service
obligations. As per recent data (2017-18), the ICR of the Textile sector was 1.4
times, Electricity and gas supply 1.3 times, Construction 1.5 times and
Telecommunication 0 times.

The DER and ICR of Public
Limited Companies (19602 companies) suggest that Industry as a whole does not
seem to be over-leveraged and the earnings of the companies are enough to serve
their debt. The DER that measures the extent of firm’s dependence on borrowed
capital over its own capital,of Public Limited Companies varied between 45.9
per cent (2013-14) to 46.2 per cent (2015-16). However, there are certain
industry groups which are over-leveraged. These include Sugar industry with a
DER of 171.6 per cent in 2015-16, Glass and Glass Products (191.8%),
Electricity, Gas Steaming and Air Conditioning Supply (144%), and Construction
(124%). Few other industry groups with relatively high DER include Paper
products, Iron and Steel, and Telecommunications. High DER is also reflected in
low ICR for the above-mentioned industry groups. The ICR of the Sugar industry
group stood at 1 times, Iron and Steel (0.9 times), and Telecommunication (0.3
times) during 2015-16.

The DER and ICR of
Private Limited Companies (2,92,308 companies) also suggest that Private Limited
Companies as a whole are not over-leveraged and earning enough to serve their
debt. However, there are certain sector or industry groups which exhibit higher
DER and lower ICR. Construction and Hotel and Restaurant, and Real Estate
Industry groups are found to be highly leveraged with 137 per cent, 112 per
cent, and 101 per cent DER respectively in 2015-16. Other industry groups with
relatively higher leverage ratio include Paper and Paper Products, and Iron and
steel. On the other side, among the Private Limited Companies, only Iron and
Steel industry group exhibited lower ICR (0.7) in 2015-16. Within the Private
Limited Companies, the highly leveraged industry groups also exhibit higher
ICR. It suggests that companies in the above-mentioned industry groups have the
capacity to serve their debt even they are highly leveraged.

There are certain
industry groups which are more capital intensive and tend to borrow more. Iron
and Steel, Construction and the Real Estate industry groups are more capital
intensive in nature and, therefore, tend to borrow more. However, certain
industry groups like Sugar and Paper and Paper Products have borrowed more,
even if the nature of their activity and operation do not require more capital
through borrowings.

The Infrastructure
Sector has also become highly leveraged in recent years. The DER of all major
infrastructure companies increased substantially, beginning 2013. During 2016
and 2017, the infrastructure sector received 32.8 percent and 34 percent of the
total bank credit respectively. This is the sector which has become the source
of substantial volume of NPAs. Several of the infrastructure companies have
been declared as willful defaulters, implying misuse of borrowed funds.

The notion that weak
corporate balance sheet or performance is the prime reason behind loan failures
do not seem to be correct. There are only few sectors which may be having a genuine
case of weak performance leading to non-performance of bank loans. It is also
true that within the sector while several firms are doing well, others are
highly leveraged and unable to payback. The companies those have failed to
payback, many of them have also been declared as willful defaulter, which suggests
that the fund is diverted or misused for a purpose other than originally intended
by the borrower. Recent developments in the banking sector with respect to scam
and impropriety further confirms that there has been rampant misuse of borrowed
funds by these large borrowers. This has been done in collusion with the bank
officials and other vested interest groups. Politically
induced lending has also become rampant and often facilitates the collusion
that encourages corrupt practices. This questions the notion that weak
corporate performance is responsible for loan defaults. Rather it is a case of
mismanagement, misuse and diversion of fund by the large borrowers which is
responsible for the crisis in the banking sector.

The author
is Assistant Professor, Institute for Studies in Industrial Development, New
Delhi; views are personal

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